Current account deficit hits record high as GDP revised higher

Britain’s trading position with the rest of the world has deteriorated sharply with the current account deficit swelling to its widest on record, fanning fears about the sustainability of the economic recovery.

News of the ballooning current account shortfall overshadowed figures showing economic growth was stronger than first thought in the fourth quarter. GDP rose 0.6% compared with an earlier estimate of 0.5% and 0.4% growth the previous quarter, according to the Office for National Statistics (ONS).

Experts warned that even that brighter headline figure masked an unbalanced economy with consumer spending being relied on while industry contracted and business investment dropped sharply. At the same time household incomes were shown to have fallen in real terms, casting doubt over how much longer consumers could keep up their pace of spending.

It was the figures showing a sharp rise in Britain’s current account that grabbed the most attention and fuelled the debate around the UK’s economic prospects should it opt to leave the EU.

The current account deficit reflects Britain’s trade gap with the rest of the world and the shortfall between money paid out by the UK and money coming in. It swelled to £32.7bn in the fourth quarter, equivalent to 7% of GDP, up from 4.3% in the third quarter. This was the highest since quarterly records began in 1955. Economists in a Reuters poll had expected the deficit to widen to £21.1bn.

For 2015 as a whole, the current account deficit hit £96.2bn or 5.2% of GDP, the widest since records began in 1948.

Chancellor George Osborne, who is campaigning for the UK to remain in the EU, welcomed the growth upgrade by added:

“The UK is not immune to risks in the global economy as slowing global growth weighs on our outlook. Today’s figures expose the real danger of economic uncertainty and shows that now is precisely not the time to put our economic security at risk by leaving the EU.”

Current account deficit swells

Howard Archer, economist at IHS Global Insight said the widening current account deficit could become an increasing problem if financial markets lose confidence in the UK economy for any reason.

“This would make it harder for the UK to attract the investment inflows that it needs to finance the current account deficit and could weigh heavily down on sterling.”

He added: “An obvious potential trigger for the markets losing confidence in the UK economy could be a vote to leave the EU in the 23 June referendum.”

The widening in the overall current account shortfall came as Britain’s trade deficit worsened and as the deficit on investment income also widened.

As exports fell in the final quarter of 2015 but imports increased, the trade deficit grew to £12.2bn from £8.9bn in the previous quarter.

The bigger factor, was the deterioration in the so-called primary income deficit. That more than doubled to £13.1bn in the fourth quarter from £5.8bn in the third quarter, mostly on the back of a drop in receipts from direct investment and portfolio investment abroad. At the same time, there was an increase in payments to foreign direct investors.

Alan Clarke, economist at Scotiabank explained: “In other words, dividend payments to overseas investors into UK assets have far outweighed the investment income that UK investors have earned on their investments overseas.”

“The problem is that the UK economy is outperforming its neighbours (a nice problem to have). The UK’s main trading partners have not grown as fast as the UK – hence the returns on our investments in those markets have suffered. We have invested badly into slow growing markets. By contrast, overseas investors into the UK have done well.”

But that picture played down fears over foreign direct investment being hit if the UK leaves the EU, Clarke added.

“Where would you rather invest – a fast growing economy like the UK or an economy with persistent disappointments in growth?”

GDP growth picks up

Quarterly growth and levels of UK GDP. Illustration: Office for National Statistics

The GDP figures showed the services sector, the largest part of the economy, was now thought to have expanded 0.8% in the final quarter, up from the previous estimate of 0.7%. Construction output was also revised up to 0.3% growth from a previous estimate of a 0.4% contraction. Industrial production fell 0.4%.

Echoing recent signs that wage growth has flattened off, the ONS reported that real household disposable income per head fell 0.4% from the third quarter. Spending per head grew 0.4% on the quarter, suggesting people are dipping into savings.

GDP per head, which adjusts GDP for the size of the population, increased 0.4% on the quarter, below the GDP growth rate of 0.6%

Kallum Pickering, senior UK economist at the bank Berenberg said the latest batch of economic news pointed to an increasingly unbalanced economy and a country that “continues to live well beyond its means”.

“These growth patterns suggest that the UK recovery is being increasingly built on sand. Low savings make it hard for households and businesses to ride out volatility. Deficits to drive growth today come at the expense of growth tomorrow,” he said.